Virtuous circle means growth, demand
The economic policy intentions announced by President Cyril Ramaphosa were encouraging, if only because they made clear the president fully understands the imperative of faster economic growth. As indeed he should. It was not obvious his predecessor cared at all about growth.
The economic diagnosis offered was apposite. For example, to quote the president: “… businesses are not struggling with lack of access to cash. It is due to lack of confidence and a dearth of viable investment opportunities that businesses have been reluctant to spend money on fixed capital. These obstacles require policy and regulatory action that provided clarity and raise efficiency.”
It is important to recognise how JSE-listed companies have increased their dividend payments — cash paid out — relative to their after-tax earnings in recent years, for want of investment opportunities that offered high enough risk-adjusted returns. Since 2011, dividends have grown 2.5 times while earnings have increased by only 1.6 times.
Over recent years the expected returns of SA business have receded, with slower growth expected, while the risks to these expected returns have risen — as objectively reflected by the sovereign risk premium demanded of SA’s dollar denominated debt.
In the fast-growth years between 2004 and 2008 (GDP growth averaged over 5% per annum between 2004 and the second quarter of 2008, but not fast enough to keep Thabo Mbeki in his job) the SA risk premium for five-year dollardenominated debt averaged about 0.67% per annum. Since 2014 the yield on SA dollar debt has had to offer an extra 2% per annum on average.
Put another way, returns on an investment in SA assets now have to offer at least an extra 2% per annum in dollar terms to appear worth making.
In the service of growth this risk premium has to be reduced, as the president appears to understand. He also appears to recognise that the risks to SA rise and fall with realised growth. The ratings agencies remind us constantly of this, as do the currency, debt and equity markets. They reacted negatively in response to the disappointing latest GDP growth estimates for the second quarter.
With growth, more capital becomes available on better terms, to support the exchange value of the rand. A stronger rand means less inflation and lower interest rates and so further support from the demand side of the economy for growth. A virtuous circle presents itself, with growth encouraging policies. Faster growth expected with less inflation given rand strength — as opposed to slower growth, a weaker rand, and so more inflation accompanied by higher interest rates. This has been the vicious circle SA has been trapped in for many years.
One can but express the hope that the SA Reserve Bank understands the link between growth, inflation and the exchange rate, although three members of its monetary policy committee (happily not a majority) voted for higher shortterm interest rates at its meeting last week. With demand as depressed as it is and inflation outside of regulated prices as low as it is, given the weak pricing power of firms one can only wonder at the logic that called for even less demand.
SA suffers from a lack of supply and a want of demand. Stimulating demand would bring faster growth now and so less, not more, inflation. Fixing the supply side of the economy will take longer, but would permanently raise the growth potential of the economy. A Mining Charter that recognised the trade-offs between growth in output and the distribution of its benefits beyond those who take on the risks of investment would be a way of helping ourselves — and is an early test of Ramaphosa realism.